Sunday, January 25, 2009

Astute readers of The Answer is Simple, Volume understand that price information without volume information is indeterminate. As government stats roll in, I'll go ahead and ask the obvious question that main stream economists don't seem to have the insight to ask, "Who cares?"

Where to start? How about, who cares about the BLS CPI? The BLS homepage purports:

The most widely used measure of inflation, the CPI is an indicator of the effectiveness of government policy. In addition, business executives, labor leaders and other private citizens use the index as a guide in making economic decisions.

Translation: People who do not understand markets look at the CPI. Price alone tells us nothing about "effectiveness" and it gives no useful information to decision makers. The reason is buried in the flawed methodology:

The CPI represents changes in prices of all goods and services purchased for consumption by urban households.

The flaw is the word "purchased." By counting only completed sales, the index becomes price trivia, not price information--the price the last guy paid instead of the price the market will bear.

Imagine the Millionaire Sentiment Index (MSI), it surveys millionaires to determine how many intend to spend more on goods and services in the future. The headline trend looks promising:

Millionaire Sentiment Index (MSI)Millionaires Intending to Spend More

2007 - 67%2008 - 72%2009 - 88%

The economy is booming, right? Wrong. No volume. That is covered by the MI:

Millionaire Index (MI)Number of Millionaires

2007 - 3.8M2008 - 3.2M2009 - 2.1M

By measuring only the purchase price, the CPI leaves out the more critical number of how many things were not purchased. Same reason stock volume generally moves counter-trend during corrections from the primary trend. The price paid in a relatively small number of deal closures is, virtually by definition, the wrong price or more deals would close.

Why do government bureaucrats report on market prices instead of reporting on markets? Because if they understood markets, they wouldn't be bureaucrats.

Then there is propaganda. Sellers hate discounted prices for obvious reasons. They want you to think other people are willing to pay high prices (or they wouldn't hold "sales" in the first place) so the CPI inherits the same agenda:

The prices used to calculate the index are the regular cash prices in effect, including all taxes directly associated with the purchase and use of the items.

As if to compensate for the CPI's failings, we have GDP, which is equally useless because it only considers the flow volume:

GDP = C + I + G + (X − M)

The guy in the middle is scratching his head because academicians and bureaucrats scratch themselves too. Generally speaking, neither group understands markets, which again, is why they are disinclined to participate. What good is measuring the volume of dollars without knowing prices? If we blow the entire money flow on the inflated price of a single paper clip, our entire GDP amounts to a single paper clip, no matter how many dollars changed hands. The opposite happens when prices are low.

To illustrate the flaw, let's examine GDP today vs. the Great Depression. People who study the Great Depression are horrified that GDP contracted 50% over the course of the collapse. The Great Depression was worse than our condition today, right? Not so fast. In the 1920's and 30's the dollar's value was pegged to gold. This mitigated the affects of inflation and deflation in a way that is not in place today. Guess what happened to the gold price during their crash? Of course... nothing, the dollar was pegged.

What about now?

During our so-called "boom years" from 2002-2007, we had the opposite GDP phenomenon. We had a fairly steady GDP, but gold prices tripled. So our "boom" saw GDP contract by about 2/3rds, if measured the exact same way they measured during the Great Depression. If that was the boom, I can't wait to see the bust.

Then there are revisions. Revisions should never be permitted in any reliable statistic (shouldn't that be obvious?). If you discover more of something later, it should fall into the appropriate "later" report. Revisions happen because bureaucrats are risk averse. By allowing revisions they can trail reality instead of reflect reality. 20/20 hindsight allows them to be "right' more often, because they never take a stance in the first place.

During the real estate plunge, heavy handed, consistently revised (always in the same direction, oddly: down) government data killed businesses that foolishly relied on correspondingly tainted computer models. Companies like investment banks routinely made decisions based on rosy data that was later revised way down, it was too late to revise the decision down. Statistics allowing revisions are not helpful, they are harmful.

Then there are the government's black boxes. The Birth/Death model, seasonal adjustments to indexes, unidentified and/or arbitrary assumptions. These are different. These "fixes" are actually designed to spoil the data when it might be accurate. These are the "labor unions" of statistics, they want to curb peaks in value so they can't be held to the same high standard in the future. No one knows exactly what most of these things do, because no one wants to know, you see, if we knew, we would also know when we don't know, and then we would have to know all the time, but we can't know all the time, because we never knew how we found out.

The solution to these recurring statistical fumbles? Cut the Federal propaganda budget to $0.

20 comments:

Great article. I was hounded for months and month by census people, as my name got selected. They said the information was being collected for Greenspan and computing the CPI. These people were like a sitcom, or Daffy Duck and Porky as door-to-door salesmen. I purposefully avoided them after humoring them on the initial phone call. Tenacious. They would not let go, and in the end seemed only to want to check the box next to my name so they could say they had contacted me, not collect meaningful info, because I refused to give it to them. Typical bureaucrats.

Thank you for your perspective and information, it makes it very clear and understandable that we are screwed for the short-to-medium term...

So...we have major(est?) depression oncoming. Followed by so much money being dumped into every economic orifice, we end up in Weimar, Amerika?

Estimated time frames would be very much appreciated, I am middle-aged but a neophyte on economic issues...

Whether you have a lot of cash or a lot of PM or stock-stuffed 401k, understanding the signs of when each of these stages will be occurring will be critical in surviving the next decade with our asset values intact.

What are the signs/conditions to look for:

-Depression-The bottom of the U, sideways market-Beginnings of hyperinflation-Ongoing Hyperinflation-Waning Hyperinflation-Next Bubble (if we still have a Fed and Federation)

My diagram in "Bailouts Will Never End" is intended to shown that inflation is impossible without a genuine increase in creditworthy borrowers.

As creditworthiness degrades, or there are fewer borrows and more defaults, the currency supply in a debt-based monetary system also collapses. This causes price deflation.

Deflation will continue essentially forever until something stops it. The Fed could stop it on a dime, but they don't want to because it is so favorable to creditors, especially to the creditor of last resort. All they have to do is place their rate at or below the 3M Treasury rate, then people will borrow again.

The 3M T rate is the market driven rate that people opt to protect instead of risk, so if the Fed rate is above the 3M T, money will go into hiding instead of the economy. This is the primary method the Fed creates recessions/depressions for their exclusive benefit.

Hyperinflation happens two times plus all the other times I don't know about:

(1) When the government can print without regard to the asset base, like the Weimar. This is n/a for us because banks print our currency for profit, not the government. No profit, no currency.

(2) When the system stops. This one could happen. But I am not betting on it (minus a modest physical metal hedge on which I hope to lose money), until I figure out how to collect my own life insurance policy.

Many thanks, FDR. You tied a loop I was missing in my understanding. :)

It would be interesting to see banks being paid to borrow from the Fed to make loans. I.e. borrowing 1M, being actually given 1.1M (-10% rate), and being able to loan out that 1.1 million but only ever having to pay back 1 million to the Fed.

"I, Timothy Geithner do solemnly swear that I will support and defend the Constitution of the United States against all enemies, foreign and domestic...."

I wish Mr. Geithner meant what he recited this evening unfortunately the above statement uttered by more and more transparent politicians is only a symbolic gesture instead of a sincere commitment to preserve and protect the essence of this once great nation.

Personally, I see lawyers, solicitors and bureaucrats as people worth hanging from a tree when the day comes. Films like Pink Floyd's "The Wall" are still fresh after all these years.

It is not the money, but the influence. To be a free man, I can get up in the morning, do my stuff I choose to do, meet others, work, eat, care for my family, trade if we wish, live my life freely and go home. Anyone else who gets in the way of that, AT ALL, be it a person who puts the paperclips on my 1000 pieces of paper needed to be filled out and authorized before I can get up and do my stuff, or the bureaucrat who thinks they just need to pass the laws to bring me into line, is as responsible for our reduced freedoms and protection as much as anything Osama Bin Laden can throw at us.

I believe that with all my heart, and do not mean it to hurt those directly affected by 9/11.

Fudged figures collected to influence and not to reflect, are a classic "symptom" of a deteriorating police state. Just ask George Orwell.

The question is this. If we then get to a place where all business is unprofitable as the the FED, the bank, the local bureaucrats, the national bureaucrats, the international bureaucrats, the taxman and the mafia all want a slice of the pie, even before you have started to be productive, will they force us to work at the barrel of a gun? And if so, what work would they want us to do? It all sounds very Hitlerite.

My cash is in the mattress, there is a pitchfork by my door, and I am ready to take a stand. I want to stop justifying my life to all those who have no business in making my business their business. These people are a complete cancer to our freedoms.

What Osama did was like a minature war against us which lasted a day and was very much like pearl harbor.

The Fed and uncle sam eat our lunch permanently, and the thing which is SO DISILLUSIONING is that when times are toughest, the political money machine steals our wealth so much more boldly and aggressively and in our face.

They just don't even try to pretend anymore. We have a giant earmark coming up which is being pawned as fiscal stimulus but amounts to a collection of all the pork that has been blocked to date in congress. Sell it to the American people with a flimsy tax cut attached which amounts to an extra MacDonald's value meal at the end of the paycheck.

Let's hear it for Prez-Bo and the Democratic myrmidons! Congrats on passing another ill-advised stimulus package. As someone once said, those that fail to learn history are destined to repeat it. Looks like we may need to call upon some rowdy Icelanders throughout the congressional scumbags, (ie, nancy, stenny, barney to name a fes). Wonder if Putin's hired guns are willing to travel?

Between the Revolutionary war and the Ford Presidency, the US borrowed $800B. In a single today these greedy congressional bastards said f-you to all current and future tax payers. When a gov't becomes devisive and destructive the citizens have a right to remove and replace a criminal gov't---with force if necessary.

Current National Debt

About me

Understanding nature's cycles is the key to successful trading. Cycles of all scales interlock in a dance that is both artistically simple and scientifically complex. Today's predominant cycle will take us deep into an economic depression. It isn't that we as individuals cannot comprehend our fate, it is that we as a group cannot avoid it.

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Continued transfer of taxpayer funds, high yield preferred stock, risky loan guaranties, and asset holdings to the Federal Reserve and connected bankers in the face of taxpayer clamor; result: increased strain on commercial and consumer credit accelerates deflation

Main Stream Media to continue promoting Federal Reserve and banker agenda: more debt, more debt, more debt

5,000+ bank failures

More bank consolidations intended to shift FDIC insurance obligations to common stockholder losses

FDIC bailout/restructuring that compromises insurance payouts

Massive "New Deal 2.0" in order to transfer maximum wealth from the poor (taxpayers) to the Federal Reserve, connected bankers and corporations, and to benefit politicians; result: same as the original New Deal, economic depression